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October 22, 2009

More thoughts on business "crimes"

Insider trading Clear Thinkers favorite Holman Jenkins has yet another excellent column this week entitled When Bad Luck is a Crime (or, stated another way, the new crime of violating the obligation to throw in the towel).

Among other points, Jenkins notes that the mainstream media to date has done a poor job of resisting hindsight bias in reporting on business failures:

When it comes to cheering CEOs, booing them or throwing them in jail, a consideration that ought to be nagging is whether we're reacting to luck or design.

Ken Lay, to cite a notorious example, was prosecuted not for the sins that brought down Enron, but for failing to tell investors the company was predestined to fail even as he tried to save it. Exactly the same treatment is now being meted out to two ex-Bear Stearns hedge- fund managers on trial in New York this week. Then there's Ken Lewis, the Bank of America chief, who hasn't been indicted (yet) but is being roundly booed in the media because his acquisition of Merrill Lynch is deemed in retrospect to have been a mistake.

Now we might be tempted to say journalists are especially susceptible to the hindsight fallacy. But a truer statement is that we thrive on it, are its avenging angels, forever treating every bad outcome as proof of incompetence if not malfeasance, and every good outcome as the result of far-seeing excellence. [.  .  .]

.  .  .  Here, journalism, and perhaps only journalism, can unpack the final puzzle—albeit a journalism that properly understands the role of luck in determining the outcomes that so excite journalists and sometimes prosecutors in the first place.

Meanwhile, Stephen Bainbridge and Larry Ribstein -- both of whom have been pre-eminent blogosphere leaders in educating the public about business law issues -- provide insightful analysis of the legal and policy issues involved in the Galleon insider trading case that the Department of Justice initiated late last week.

As noted here before, criminalizing insider trading risks harming legal and socially beneficial trading. The line is thin indeed between illegal insider trading, on one hand, and an entirely legal and productive hedge fund operation on the other.

Sort of makes one wonder whether the criminalization of insider trading does more harm than good?

Posted by Tom at October 22, 2009 12:01 AM |


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